• Effective income tax rate excluding the 2011 portion of the MDL Provision. MasterCard excluded this item because MasterCard's management monitors provisions for material litigation settlements separately from ongoing operations and evaluates ongoing performance without these amounts. See "Income Taxes" for the table that provides a reconciliation of the effective income tax rate excluding the 2011 portion of the MDL Provision to the most directly comparable 2011 GAAP measure.

Overview
We recorded net income of $2.8 billion, or $21.94 per diluted share in 2012 versus net income of $1.9 billion, or $14.85 per diluted share in 2011, and net income of $1.8 billion, or $14.05 per diluted share in 2010. Our 2011 net income was significantly impacted by the $770 million portion of the MDL Provision ($495 million after tax) recorded in 2011. In 2012, the Company increased the provision by $20 million ($13 million after tax).
In 2012, net revenue grew at 10% compared to net revenue growth of 21% in 2011. Revenue growth in both 2012 and 2011 was driven primarily by growth in the volume of transactions and the number of transactions. We generate revenues from the fees that we charge our customers for providing transaction processing and other payment-related services and by assessing our customers based primarily on the dollar volume of activity on the cards and other devices that carry our brands. In 2012, volume-based revenues (domestic assessments and cross-border volume fees) and transaction-based revenues (transaction processing fees) increased compared to 2011 by 13%. In 2012, our processed transactions increased 25% and our MasterCard branded gross dollar volume ("GDV") increased 15% on a local currency basis. This compares to increased processed transactions of 18% and increased GDV of 16% on a local currency basis in 2011. Overall, net revenue growth for 2012 and 2011 was moderated by an increase in rebates and incentives relating to customer and merchant agreement activity. Rebates and incentives as a percentage of gross revenues were 27%, 25% and 27% in 2012, 2011 and 2010, respectively.
We generated net cash flows from operations of $2.9 billion for the year ended December 31, 2012, compared to $2.7 billion and $1.7 billion for the years ended December 31, 2011 and 2010, respectively. Operating expenses in 2012 decreased $547 million, or 14%, from 2011 and increased in 2011 $1.2 billion, or 44%, from 2010 primarily due to the 2011 portion of the MDL Provision.

The following table provides a summary of our operating results for the years ended December 31, 2012, 2011 and 2010:

                                                                                       Percent Increase
                                          For the Years Ended December 31,                (Decrease)
                                         2012             2011           2010        2012          2011
                                              (in millions, except per share data and percentages)
Revenues, net                        $    7,391       $    6,714      $  5,539       10%            21%

Operating expenses                        3,454            4,001         2,787      (14)%           44%
Operating income                          3,937            2,713         2,752       45%           (1)%
Operating margin1                          53.3 %           40.4 %        49.7 %      **            **

Income tax expense                        1,174              842           910       40%           (8)%
Effective income tax rate                  29.9 %           30.6 %        33.0 %      **            **

Net Income Attributable to
MasterCard                           $    2,759       $    1,906      $  1,846       45%            3%

Diluted Earnings per Share           $    21.94       $    14.85      $  14.05       48%            6%
Diluted Weighted-Average Shares
Outstanding                                 126              128           131       (2)%          (2)%

** Not meaningful.
1 Operating margin is defined as operating income divided by Revenues, net. Our operating margin was negatively impacted by 1 percentage point and 12 percentage points for the years ended December 31, 2012 and 2011, respectively, due to the MDL Provision.
Business Environment
We process transactions from more than 210 countries and territories and in more than 150 currencies. Net revenue generated in the United States was 39%, 40% and 42% of total net revenue in 2012, 2011 and 2010, respectively. No individual country, other than the United States, generated more than 10% of total revenues in any period, but differences in market growth, economic health, and foreign exchange fluctuations in certain countries have increased the proportion of revenues generated outside the United States over time. While the global nature of our business helps protect our operating results from adverse economic conditions in a single or a few countries, the significant concentration of our revenues generated in the United States makes our business particularly susceptible to adverse economic conditions in the United States. The competitive and evolving nature of the global payments industry provides both challenges to and opportunities for the continued growth of our business. Unprecedented events which began during 2008 impacted the financial markets around the world, including continued distress in the credit environment, continued equity market volatility and additional government intervention. The economies of the United States and numerous countries around the world were significantly impacted by this economic turmoil. Countries have experienced credit ratings actions by ratings agencies, including several in Europe as well as the United States. In addition, some existing customers have been placed in receivership or administration or have a significant amount of their stock owned by their governments. Many financial institutions are facing increased regulatory and governmental influence, including potential further changes in laws and regulations. Many of our financial institution customers, merchants that accept our brands and cardholders who use our brands have been directly and adversely impacted.
MasterCard's financial results may be negatively impacted by actions taken by individual financial institutions or by governmental or regulatory bodies. The condition of the economic environments may accelerate the timing of or increase the impact of risks to our financial performance. As a result, our revenue may be negatively impacted, or the Company may be impacted in several ways. MasterCard continues to monitor the extent and pace of economic recovery around the world to identify opportunities for the continued growth of our business and to evaluate the evolution of the global payments industry. For example, in our Asia Pacific and Latin American regions, we continue to see significant increases in dollar volume of activity on cards carrying our brands in those regions while in the United States and Europe we have experienced growth in dollar volume despite mixed economic indicators. Notwithstanding recent encouraging trends, the extent and pace of economic recovery in various regions remains uncertain and the overall business environment may present challenges for MasterCard to grow its business. For a full discussion see "Risk Factors - Business Risk" in Part I, Item 1A of this Report.
In addition, our business and our customers' businesses are subject to regulation in many countries. Regulatory bodies may seek to impose rules and price controls on certain aspects of our business and the payments industry. See Note 18 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 and our risk factor in "Risk Factors - Legal and Regulatory Risks" in Part I, Item 1A of this Report for further discussion. Further, information security risks for global payments and technology companies such as MasterCard have significantly increased in recent years. Although to date we have

not experienced any material impacts relating to cyber-attacks or other information security breaches, there can be no assurance that we will be immune to these risks and not suffer such losses in the future. See our risk factor in "Risk Factors - Business Risks" in Part I, Item 1A of this Report related to a failure or breach of our security systems or infrastructure as a result of cyber-attacks.
Impact of Foreign Currency Rates
Our overall operating results are impacted by changes in foreign currency exchange rates, especially the strengthening or weakening of the U.S. dollar versus the euro and Brazilian real. The functional currency of MasterCard Europe, our principal European operating subsidiary, is the euro, and the functional currency of our Brazilian subsidiary is the Brazilian real. Accordingly, the strengthening or weakening of the U.S. dollar versus the euro and Brazilian real impacts the translation of our European and Brazilian subsidiaries' operating results into the U.S. dollar. For 2012 as compared to 2011, the US dollar strengthened against both the euro and the Brazilian real. For 2011 compared to 2010, the U.S. dollar weakened against both the euro and the Brazilian real. Accordingly, the net foreign currency impact of changes in the U.S. dollar average exchange rates against the euro and Brazilian real decreased net income in 2012 compared to 2011 by 7 percentage points. Conversely, net income in 2011 was positively impacted by currency by approximately 2 percentage points.
In addition, changes in foreign currency exchange rates directly impact the calculation of GDV and gross euro volume ("GEV"), which are used in the calculation of our domestic assessments, cross-border volume fees and volume related rebates and incentives. In most non-European regions, GDV is calculated based on local currency spending volume converted to U.S. dollars using average exchange rates for the period. In Europe, GEV is calculated based on local currency spending volume converted to euros using average exchange rates for the period. As a result, our domestic assessments, cross-border volume fees and volume related rebates and incentives are impacted by the strengthening or weakening of the U.S. dollar versus primarily non-European local currencies and the strengthening or weakening of the euro versus primarily European local currencies. The strengthening or weakening of the U.S. dollar is evident when GDV growth on a U.S. dollar converted basis is compared to GDV growth on a local currency basis. In 2012, GDV on a U.S. dollar converted basis increased 12%, versus GDV growth on a local currency basis of 15%. In 2011, GDV on a U.S. dollar converted basis increased 19%, versus GDV growth on a local currency basis of 16%. The Company attempts to manage these foreign currency exposures through its foreign exchange risk management activities, which are discussed further in Note 20 (Foreign Exchange Risk Management) to the consolidated financial statements included in Part II, Item 8 of this Report.
The Company generates revenues and has financial assets in countries at risk for currency devaluation. While these revenues and financial assets are not material to MasterCard on a consolidated basis, they could be negatively impacted if a devaluation of local currencies occurs relative to the U.S. dollar. Acquisitions
On April 15, 2011, MasterCard acquired the prepaid card program management operations of Travelex Holdings Ltd., since renamed Access Prepaid Worldwide ("Access"), at a purchase price of 295 million U.K. pound sterling, or $481 million, including adjustments for working capital, with contingent consideration (an "earn-out") of up to an additional 35 million U.K. pound sterling, or approximately $57 million, if certain performance targets were met. See Note 2 (Acquisitions) to the consolidated financial statements included in Part II, Item 8 of this Report. Through Access, MasterCard manages and delivers consumer and corporate prepaid travel cards through business partners around the world, including financial institutions, retailers, travel agents and foreign exchange bureaus. Access has enabled MasterCard to offer end-to-end prepaid card solutions encompassing branded switching, issuer processing and program management services, primarily focused on the travel sector and in markets outside the United States.
On October 22, 2010, MasterCard acquired all the outstanding shares of DataCash Group plc ("DataCash"), a payment service provider with operations in Europe and Brazil, at a purchase price of 334 million U.K. pound sterling, or $534 million. DataCash provides e-commerce merchants with the ability to process secure payments across the world. DataCash develops and provides outsourced electronic payments solutions, fraud prevention, alternative payment options, back-office reconciliation and solutions for merchants selling via multiple channels. MasterCard believes the acquisition of DataCash creates a long-term growth platform in the e-commerce category while enhancing existing MasterCard payment products and expanding its global presence in the internet gateway business.

Financial Results
Revenues
Revenue Description
MasterCard's business model involves four participants in addition to us:
cardholders, merchants, issuers (the cardholders' financial institutions) and acquirers (the merchants' financial institutions). Our gross revenues are typically based on the volume of activity on cards and other devices that carry our brands, the number of transactions we process for our customers or the nature of other payment-related services we provide to our customers. Our revenues are based upon transactional information accumulated by our systems or reported by our customers. Our primary revenue billing currencies are the U.S. dollar, euro and Brazilian real.
Our pricing is complex and is dependent on the nature of the volumes, types of transactions and other products and services we offer to our customers. The following factors impact pricing:
• Domestic or cross-border

•            Signature-based (credit and debit) or PIN-based (debit, including
             automated teller machine ("ATM") cash withdrawals and retail
             purchases)

• Tiered rates that fluctuate based on volume/transaction hurdles

• Geographic region or country

• Retail purchase or cash withdrawal

• Processed or not processed by MasterCard

In general, a cross-border transaction generates higher revenue than a domestic transaction since cross-border fees are higher than domestic fees, and in most cases also include fees for currency conversion.
We review our pricing and implement pricing changes on an ongoing basis. In addition, standard pricing varies among our regions, and such standard pricing can be modified for our customers through customer-specific incentive and rebate agreements.
The Company classifies its net revenues into the following five categories:
1. Domestic assessments: Domestic assessments are fees charged to issuers and acquirers based primarily on the volume of activity on cards and other devices that carry our brands where the merchant country and the issuer country are the same. A portion of these assessments is estimated based on aggregate transaction information collected from our systems and projected customer performance and is calculated by converting the aggregate volume of usage (purchases, cash disbursements, balance transfers and convenience checks) from local currency to the billing currency and then multiplying by the specific price. In addition, domestic assessments include items such as card assessments, which are fees charged on the number of cards issued or assessments for specific purposes, such as acceptance development or market development programs. Acceptance development fees are charged primarily to U.S. issuers based on components of volume, and support our focus on developing merchant relationships and promoting acceptance at the point of sale. Market development fees are charged primarily to issuers and acquirers based on components of volume, and support our focus on building brand awareness and card activation, increasing purchase volumes, cross-border card usage, and other general marketing purposes.

2. Cross-border volume fees: Cross-border volume fees are charged to issuers and acquirers based on the volume of activity on cards that carry our brands where the merchant country and the issuer country are different. Cross-border volume fees are calculated by converting the aggregate volume of usage (purchases and cash disbursements) from local currency to the billing currency and then multiplying by the specific price. Cross-border volume fees also include fees charged to issuers for performing currency conversion services.

3. Transaction processing fees: Transaction processing fees are charged for both domestic and cross-border transactions and are primarily based on the number of transactions. These fees are calculated by multiplying the number and type of transactions by the specific price for each service. Transaction processing fees include charges for the following:

• Transaction Switching - Authorization, Clearing and Settlement.

?                     Authorization refers to the process by which a transaction
                      is routed to the issuer for approval and then a decision
                      whether or not to approve the transaction is made by the
                      issuer or, in certain circumstances such as when the
                      issuer's systems are unavailable or cannot be contacted, by
                      MasterCard or others on behalf of the issuer in accordance
                      with either the issuer's instructions or applicable rules
                      (also known as "stand-in"). Our standards, which may vary
                      across regions, establish the circumstances under which
                      merchants and acquirers must seek authorization of
                      transactions. Fees for authorization are primarily paid by
                      issuers.


?                     Clearing refers to the exchange of financial transaction
                      information between issuers and acquirers after a
                      transaction has been successfully conducted at the point of
                      interaction. MasterCard clears transactions among customers
                      through our central and regional processing systems. Fees
                      for clearing are primarily paid by issuers.


?                     Settlement. Once transactions have been authorized and
                      cleared, MasterCard helps to settle the transactions by
                      facilitating the exchange of funds between parties. Once
                      clearing is completed, a daily reconciliation is provided
                      to each customer involved in settlement, detailing the net
                      amounts by clearing cycle and a final settlement position.
                      Fees for settlement are primarily paid by issuers.


•               Connectivity fees are charged to issuers and acquirers for
                network access, equipment and the transmission of authorization
                and settlement messages. These fees are based on the size of the
                data being transmitted through and the number of connections to
                the Company's network.


4.        Other revenues: Other revenues for other payment-related services are
          primarily dependent on the nature of the products or services provided
          to our customers but are also impacted by other factors, such as
          contractual agreements. Examples of other revenues are fees associated
          with the following:


•               Fraud products and services used to prevent or detect fraudulent
                transactions. This includes warning bulletin fees which are
                charged to issuers and acquirers for listing invalid or
                fraudulent accounts either electronically or in paper form and
                for distributing this listing to merchants.


•               Cardholder services fees are for benefits provided with
                MasterCard-branded cards, such as insurance, telecommunications
                assistance for lost cards and locating ATMs.


•               Consulting and research fees are primarily generated by
                MasterCard Advisors, the Company's professional advisory services
                group. The Company's business agreements with certain customers
                and merchants may include consulting services as an incentive.


•               Program management services provided to prepaid card issuers.
                This primarily includes foreign exchange margin, commissions,
                load fees, and ATM withdrawal fees paid by cardholders on the
                sale and encashment of prepaid cards. See Note 2 (Acquisitions)
                to the consolidated financial statements included in Part II,
                Item 8 of this Report for further discussion.


•               The Company also charges for a variety of other payment-related
                services, including rules compliance, account and transaction
                enhancement services, holograms and publications.


5.        Rebates and incentives (contra-revenue): Rebates and incentives are
          provided to certain MasterCard customers and are recorded as
          contra-revenue in the same period that revenue is earned or performance
          occurs. Performance periods vary depending on the type of rebate or
          incentive, including commitments to the agreement term, hurdles for
          volumes, transactions or issuance of new cards, launch of new programs,
          or the execution of marketing programs. Rebates and incentives are
          calculated based on estimated performance, the timing of new and
          renewed agreements and the terms of the related business agreements.

Revenue Analysis
In 2012 and 2011, gross revenues increased $1.2 billion and $1.4 billion, or 13% and 18%, respectively. Revenue growth in 2012 and 2011 was primarily due to increased dollar volume of activity on cards carrying our brands and increased transactions.

Rebates and incentives in 2012 and 2011 increased $488 million and $202 million, or 22% and 10%, versus 2011 and 2010, respectively. Our net revenues in 2012 and 2011 increased 10% and 21% versus 2011 and 2010, respectively.
Our revenues are primarily based on transactions and volumes, which are driven by the number of transactions and the dollar volume of activity on cards and other devices carrying our brands. In 2012, our processed transactions increased 25% and our GDV increased 15% on a local currency basis. In 2011, our processed transactions increased 18% and our GDV increased 16% on a local currency basis. The acquisitions of Access and DataCash contributed approximately 3% to our net revenue growth in 2011. There was no significant impact on net revenue growth in 2012 from additional acquisitions. The effects of pricing actions implemented in 2012 and 2011 contributed approximately 3 and 2 percentage points to our net revenue growth for 2012 and 2011, respectively.
The following table provides a summary of the trend in volume growth:

                                                                          Years Ended December 31,
                                                                 2012                                 2011
                                                   Growth (USD)      Growth (Local)      Growth (USD)     Growth (Local)
MasterCard Branded GDV1                                  12 %               15 %                19 %             16 %
Asia Pacific/Middle East/Africa                          21 %               23 %                31 %             23 %
Canada                                                    7 %                8 %                12 %              7 %
Europe                                                    9 %               16 %                21 %             17 %
Latin America                                             9 %               19 %                25 %             23 %
United States                                             9 %                9 %                10 %             10 %
Cross-border GDV Growth                                                     16 %                                 19 %

1 GDV generated by Maestro and Cirrus cards is not included in the measurement of the growth rate.
A significant portion of our revenue is concentrated among our five largest customers. In 2012, the net revenues from these customers were approximately . . .